Tag Archives: First Time Home Buyer

BofA Has A Troubling Answer

America’sbiggest as of 2016 generation, the Millennials, has a heavy burden on itscollective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless “bullish” housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents’ basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can’t afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recentGoBanking Survey found last year, according to which 72% of “young millennials”- those between 18 and 24 years old – had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the “older millennials”, those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That’s the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: “Is it [still] cool to buy a home.“

To our surprise, Meyer found that while the home ownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family home building, and confirming empirical observations that Millennials have largely been a ‘renter’ generation, by Bank of America’s calculations, the Millennial generation can afford to buy a home – at least in terms of making the monthly payments. While we – and many others would dispute that – BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and child rearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it’s not money it’s clearly something else. Let’s dig in.

First, here is BofA on a rather trivial, if critical topic: “the importance of the youth”

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in home ownership. But, it is complicated – we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR’s methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults– remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments.With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed’s credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR’s Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more home ownership will be delayed.

City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in home ownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the home ownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough down payment and tighter credit standards. Lifestyle changes are partly to blame.

BofA’ troubling conclusion: “These dynamics won’t change in the medium-term which should translate to a lower equilibrium pace for single family housing starts.”

(ZeroHedge), contracts to buy previously owned U.S. homes declined in March after rising a month earlier by the most since 2010, as perhaps the seasonal exuberance gives way to affordability constraints. Despite NAR’s comments that “home shoppers are coming out in droves this spring,” it is evident from the chart below that pending home sales have been stagnant for almost two years.

Regionally, only The South saw a sales increase:

The PHSI in the Northeast decreased 2.9 percent to 99.1 in March, but is still 1.8 percent above a year ago.

In the Midwest the index declined 1.2 percent to 109.6 in March, and is now 2.4 percent lower than March 2016.

Pending home sales in the South rose 1.2 percent to an index of 129.4 in March and are now 3.9 percent above last March.

The index in the West fell 2.9 percent in March to 94.5, and is now 2.7 percent below a year ago.

Lawrence Yun, NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year.

“Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range,” he said.

“In most areas, the lower the price of a home for sale, the more competition there is for it. That’s the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall.“

Yun worries that the painfully low supply levels this spring could heighten price growth — at 6.8 percent last month — even more in the months ahead. Homes in March came off the market at a near-record pace 1, and indicating an increase in the likelihood of listings receiving multiple offers, 42 percent of homes sold at or above list price (the second highest amount since NAR began tracking in December 2012).

Don’t Call It A Comeback: How Rising Home Values May Be Stifling Inventory

U.S. home inventory tumbled to a new low in the first quarter of 2017, falling for eight consecutive quarters. Homebuyers have now been stifled by low inventory for the last two years despite prices rising to pre-recession highs in many markets.

In this edition of Trulia’s Inventory and Price Watch, we examine how home value recovery may be limiting supply in markets that have recovered most. We find that homebuyers in markets with the biggest gains are facing the tightest supply.

The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market. Segmentation is important because home seekers need information not just about total inventory, but also about inventory in the price range they are interested in buying. For example, changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.

Looking at the housing stock nationally and in the 100 largest U.S. metros from Q1 2012 to Q1 2017, we found:

Nationally, the number of starter and trade-up homes continues drop, falling 8.7% and 7.9% respectively, during the past year, while inventory of premium homes has fallen by just 1.7%;

The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers. Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year, whereas premium homebuyers only need to shell out 0.9% more of their income;

A strong recovery may be partly to blame for the large drop in inventory some markets have experienced over the past five years. On average, the more valuable a market’s housing is compared to pre-recession levels, the larger drop in inventory it is has seen.

2017 Ushers in a Dramatic Shortage of Homes

Nationally, housing inventory dropped to its lowest level on record in 2017 Q1. The number of homes on the market dropped for the eighth consecutive quarter, falling 5.1% over the past year. In addition:

The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year;

The number of trade-up homes on the market decreased by 7.9%, while the share of trade-up homes dropped from 23.9% to 23%. Trade-up homebuyers today will need to pay 1.6% more of their income for a home than last year;

The number of premium homes on the market decreased by 1.7%, while the share of premium homes increased from 50% to 51%. Premium homebuyers today will need to spend 0.6% more of their income for a home than last year.

How and Where a Strong Housing Market May Be Hurting Inventory

In the first edition of ourreport, we provided a few reasons why inventory is low: (1) investors bought up much of the foreclosure home inventory during the financial crisis and turned them into rental units, (2) price spread – that is, when prices of homes in different segments of the housing market diverge from each other – makes it difficult for existing homeowners to tradeup to the next the segment, and (3) slow home value recovery was making it difficult for some homeowners to break even on their homes. While there isevidencethat investors indeed converted owner-occupied homes into rentals as well as evidence from our first report that increasing price spread is correlated with decreases in inventory, little work has examined how home value recovery affects inventory. This is perhaps due to the tricky conceptual relationship between home values and inventory: too little recovery might make it difficult for homeowners to sell their home but cheap to buy one, while too much recovery might make it easy for them to sell but difficult to buy.

In fact, we find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years. The linear correlation was moderate (-0.36) and statistically significant. We also found that markets with the strongest recovery, on average, have experienced the largest decreases in inventory.

For example, the five-year average change in inventory of housing markets currently valued below their pre-recession peak (< 95% of peak value) isn’t that different from ones that have recovered to 95% – 105% of their peak. (-27.6% vs. -30.1%). However, the average change in inventory in well-recovered markets (> 105%) is 0more drastic at -45.4%.

The disparity also persists when looking at changes in inventory within each segment, although the difference is largest for starter homes. On average, markets with less than 95% recovery or 95% to 105% recovery had a 34.2% and 31.7% decrease in starter inventory, while markets with more than 105% home value recovery had a whopping 58.2% drop. These findings suggest that a moderate home value recovery doesn’t affect inventory much, but a strong recovery does and impacts inventory of starter homes the most.

According to the National Association of REALTORS®, 25% of primary home buyers are single. Some of these non-married buyers, statistics show, buy homes jointly with other non-married buyers such as boyfriends, girlfriends or partners.

If you’re a non-married, joint home buyer, though, before signing at your closing, you’ll want to protect your interests.

Different from married home buyers, non-married buyers get almost no estate-planning protection on the state or federal level which can be, at minimum, an inconvenience and, at worst, result in foreclosure.

Non-Married Buyers Should Seek Professional Advice

The video clip referenced above is from 2007 but remains relevant today. It’s a four-minute breakdown which covers the risks of buying a home with a partner, and the various ways by which joint, non-married buyers can seek protection.

The process starts with an experienced real estate attorney.

The reason you’re seeking an attorney is because, at minimum, the following two documents should be drafted for signatures. They are :

Cohabitation Agreement

Property Agreement

The Cohabitation Agreement is a document which describes each person’s financial obligation to the home. It should include details on which party is responsible for payment of the mortgage, real estate taxes and insurance; the down payment made on the mortgage; and necessary repairs.

It will also describe the disposition of the home in the event of a break-up or death of one party which, unfortunately, can happen.

The second document, the Property Agreement, describes the physical property which you may accumulate while living together, and its disposition if one or both parties decide to move out.

A well-drafted Property Agreement will address furniture, appliances, plus other items brought into the joint household, and any items accumulated during the period of co-habitation.

It’s permissible to have a single real estate attorney represent both parties but, for maximum protection, it’s advised that both buyers hire counsel separately. This will add additional costs but will be worth the money paid in the event of catastrophe or break-up.

Also, remember that search engines cannot substitute for a real, live attorney. There are plenty of “cheap legal documents” available online but do-it-yourself lawyering won’t always hold up in court — especially in places where egregious errors or omissions have been made.

It’s preferable to spend a few hundred dollars on adequate legal protection as compared to the costs of fighting a courtroom battle or foreclosure.

Furthermore, a proper agreement will help keep the home out of probate in the event of a death of one or both parties.

Mortgages For First-Time Home Buyers

Many non-married, joint home buyers are also first-time home buyers and, for first-time home buyers, there are a number of low- and no-down payment mortgage options to put home ownership more within reach.

Among the most popular programs are the FHA mortgage and the USDA home loan.

The FHA mortgage is offered by the majority of U.S. lenders and allows for a minimum down payment of just 3.5 percent. Mortgage rates are often as low (or lower) than comparable loans from Fannie Mae or Freddie Mac; and underwriting requirements are among the loosest of all of today’s loan types.

FHA loans can be helpful in other ways, too.

As one example, the FHA offers a construction loan program known as the 203k which allows home buyers to finance construction costs into the purchase of their home. FHA home buyers have financed new garages, new windows, new siding and new floors via the 203k program.

FHA loans are also made with an “assumable” clause. This means that when you sell a home with FHA financing attached to it, the buyer of the home can “assume” the existing mortgage at its existing interest rate.

If mortgage rates move to 8 percent in 2020, you could sell your home to a buyer with an assumable FHA mortgage attached at 4.50%.

USDA loans are also popular among first-time home buyers.

Backed by the U.S. Department of Agriculture, USDA loans are available in many suburban and rural areas nationwide, and can be made as a no-money-down mortgage.

USDA mortgage rates are often lower than even FHA mortgage rates.

Domestic and business partnerships sometimes end unhappily. Engagements end and partnerships sour. Nobody intends for it to happen, but it does. It’s best to expect the best, but prepare for the worst.

All parties should seek equal legal protection in the event of a break-up.

Despite an improving job market and low interest rates, the share of first-time homebuyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released by the National Association of Realtors (NAR). The survey additionally found that an overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.

The 2014 NAR Profile of Home Buyers and Sellers continues a long-running series of large national NAR surveys evaluating the demographics, preferences, motivations, plans and experiences of recent home buyers and sellers; the series dates back to 1981. Results are representative of owner-occupants and do not include investors or vacation homes.

The long-term average in this survey, dating back to 1981, shows that four out of 10 purchases are from first-time home buyers. In this year’s survey, the share of first-time home buyers dropped five percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent).

“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, NAR chief economist. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”

Yun added, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”

The household composition of buyers responding to the survey was mostly unchanged from a year ago. Sixty-five percent of buyers were married couples, 16 percent single women, nine percent single men and eight percent unmarried couples.

In 2009, 60 percent of buyers were married, 21 percent were single women, 10 percent single men and 8 percent unmarried couples. Thirteen percent of survey respondents were multi-generational households, including adult children, parents and/or grandparents.

The median age of first-time buyers was 31, unchanged from the last two years, and the median income was $68,300 ($67,400 in 2013). The typical first-time buyer purchased a 1,570 square-foot home costing $169,000, while the typical repeat buyer was 53 years old and earned $95,000. Repeat buyers purchased a median 2,030-square foot home costing $240,000.

When asked about the primary reason for purchasing, 53 percent of first-time buyers cited a desire to own a home of their own. For repeat buyers, 12 percent had a job-related move, 11 percent wanted a home in a better area, and another 10 percent said they wanted a larger home. Responses for other reasons were in the single digits.

According to the survey, 79 percent of recent buyers said their home is a good investment, and 40 percent believe it’s better than stocks.

Financing the purchase Nearly nine out of 10 buyers (88 percent) financed their purchase. Younger buyers were more likely to finance (97 percent) compared to buyers aged 65 years and older (64 percent). The median down payment ranged from six percent for first-time buyers to 13 percent for repeat buyers. Among 23 percent of first-time buyers who said saving for a down payment was difficult, more than half (57 percent) said student loans delayed saving, up from 54 percent a year ago.

In addition to tapping into their own savings (81 percent), first-time homebuyers used a variety of outside resources for their loan downpayment. Twenty-six percent received a gift from a friend or relative—most likely their parents—and six percent received a loan from a relative or friend. Ten percent of buyers sold stocks or bonds and tapped into a 401(k) fund.

Ninety-three percent of entry-level buyers chose a fixed-rate mortgage, with 35 percent financing their purchase with a low-down payment Federal Housing Administration-backed mortgage (39 percent in 2013), and nine percent using the Veterans Affairs loan program with no downpayment requirements.

“FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” said Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”

Buyers used a wide variety of resources in searching for a home, with the Internet (92 percent) and real estate agents (87 percent) leading the way. Other noteworthy results included mobile or tablet applications (50 percent), mobile or tablet search engines (48 percent), yard signs (48 percent) and open houses (44 percent).

According to NAR President Steve Brown, co-owner of Irongate, Inc., Realtors® in Dayton, Ohio, although more buyers used the Internet as the first step of their search than any other option (43 percent), the Internet hasn’t replaced the real estate agent’s role in a transaction.

“Ninety percent of home buyers who searched for homes online ended up purchasing their home through an agent,” Brown said. “In fact, buyers who used the Internet were more likely to purchase their home through an agent than those who didn’t (67 percent). Realtors are not only the source of online real estate data, they also use their unparalleled local market knowledge and resources to close the deal for buyers and sellers.”

When buyers were asked where they first learned about the home they purchased, 43 percent said the Internet (unchanged from last year, but up from 36 percent in 2009); 33 percent from a real estate agent; 9 percent a yard sign or open house; six percent from a friend, neighbor or relative; five percent from home builders; three percent directly from the seller; and one percent a print or newspaper ad.

Likely highlighting the low inventory levels seen earlier in 2014, buyers visited 10 homes and typically found the one they eventually purchased two weeks quicker than last year (10 weeks compared to 12 in 2013). Overall, 89 percent were satisfied with the buying process.

First-time home buyers plan to stay in their home for 10 years and repeat buyers plan to hold their property for 15 years; sellers in this year’s survey had been in their previous home for a median of 10 years.

The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).

This year’s survey also highlighted the significant role transportation costs and “green” features have in the purchase decision process. Seventy percent of buyers said transportation costs were important, while 86 percent said heating and cooling costs were important. Over two-thirds said energy efficient appliances and lighting were important (68 and 66 percent, respectively).

Seventy-nine percent of respondents purchased a detached single-family home, eight percent a townhouse or row house, 8 percent a condo and six percent some other kind of housing. First-time home buyers were slightly more likely (10 percent) to purchase a townhouse or a condo than repeat buyers (seven percent). The typical home had three bedrooms and two bathrooms.

The majority of buyers surveyed purchased in a suburb or subdivision (50 percent). The remaining bought in a small town (20 percent), urban area (16 percent), rural area (11 percent) or resort/recreation area (three percent). Buyers’ median distance from their previous residence was 12 miles.

Characteristics of sellers The typical seller over the past year was 54 years old (53 in 2013; 46 in 2009), was married (74 percent), had a household income of $96,700, and was in their home for 10 years before selling—a new high for tenure in home. Seventeen percent of sellers wanted to sell earlier but were stalled because their home had been worth less than their mortgage (13 percent in 2013).

“Faster price appreciation this past year finally allowed more previously stuck homeowners with little or no equity the ability to sell after waiting the last few years,” Yun said.

Sellers realized a median equity gain of $30,100 ($25,000 in 2013)—a 17 percent increase (13 percent last year) over the original purchase price. Sellers who owned a home for one year to five years typically reported higher gains than those who owned a home for six to 10 years, underlining the price swings since the recession.

The median time on the market for recently sold homes dropped to four weeks in this year’s report compared to five weeks last year, indicating tight inventory in many local markets. Sellers moved a median distance of 20 miles and approximately 71 percent moved to a larger or comparably sized home.

A combined 60 percent of responding sellers found a real estate agent through a referral by a friend, neighbor or relative, or used their agent from a previous transaction. Eighty-three percent are likely to use the agent again or recommend to others.

For the past three years, 88 percent of sellers have sold with the assistance of an agent and only nine percent of sales have been for-sale-by-owner, or FSBO sales.

For-sale-by-owner transactions accounted for 9 percent of sales, unchanged from a year ago and matching the record lows set in 2010 and 2012; the record high was 20 percent in 1987. The share of homes sold without professional representation has trended lower since reaching a cyclical peak of 18 percent in 1997.

Factoring out private sales between parties who knew each other in advance, the actual number of homes sold on the open market without professional assistance was 5 percent. The most difficult tasks reported by FSBOs are getting the right price, selling within the length of time planned, preparing or fixing up the home for sale, and understanding and completing paperwork.

NAR mailed a 127-question survey in July 2014 using a random sample weighted to be representative of sales on a geographic basis. A total of 6,572 responses were received from primary residence buyers. After accounting for undeliverable questionnaires, the survey had an adjusted response rate of 9.4 percent. The recent home buyers had to have purchased a home between July of 2013 and June of 2014. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent. All information is characteristic of the 12-month period ending in June 2014 with the exception of income data, which are for 2013.